Wednesday, September 12, 2007

Go West, Young Sheik

Greg Corcoran over at the WSJ DealJournal has a cautionary message today for US investment banks already reeling from subprime contagion, LBO "pier" loans, and an M&A market gone AWOL: The Arabs are coming.
According to this eFinancial News story, Dubai’s ruling sheik will open an investment bank that will compete in the Middle East and Africa and eventually move in on Europe and the U.S. You might want to remember the name: Al Noor Islamic Bank.

I don't know why. The trashbins of Wall Street are cluttered with the names of foreign commercial and investment banks that tried and failed to make a go of it in the cutthroat US market. Every few years or so—usually during an extended upswing in the markets—yet another bright-eyed foreigner gets a hard-on about the idea of muscling in on Goldman Sachs, Merrill Lynch, and Citigroup in the biggest market in the world. They launch fancy new offices, snap up a bunch of high-priced talent from other investment banks, and throw their balance sheet around in a futile attempt to buy market share. Often (First Boston, DLJ, Dillon Read, PaineWebber, Bankers Trust, Alex. Brown), they shell out an outrageous sum to buy the brand name and rapidly depreciating loyalty of a bunch of Yankee i-bankers. They usually run very nice, expensive, four-color ads in all the right magazines.

And in three or four years, if they are lucky, they are gone, with only a gaping hole in their balance sheet to show for the effort. Some do cling to life here and even prosper, to an extent, but this is usually because they have brought so many American investment bankers on board that they really look and behave completely like a US investment bank. There is absolutely nothing Swiss, German, Japanese, or French about any of the US branches of the survivors. And if the foreign parent tries to force a little of the old country culture or business practices on their American cousins, eventually the only sound you hear is the shuffling of Gucci loafers out the front door.

So what makes these benighted sods think they can succeed where so many others have failed? Well, usually, in addition to an overoptimistic assessment of their own manhood, the answer is money. "We have gobs and gobs of money," they say, "Why can't we beat those conniving bastards at their own game?" Mr. Corcoran seems to buy into this argument as well, given how approvingly he reports the bajillions of petrodollars those clever sheiks are packing under their burnooses.

The answer, of course, is that money is not the only thing, or even the most important thing in investment banking. (We are not talking about bonuses now.) Investment banks derive their power, capability, reach, and skill from the strength and connectedness of their bankers', salespeoples', and traders' networks, both within and outside the firm. If you do not have multiple personal and institutional relationships with potential investment banking clients, you stand a poor chance of getting good, profitable mandates. Likewise, if you do not have multiple personal relationships with other bankers, salespeople, and traders within your own investment bank, you will find it hard to call on favors, threaten, and wheedle to the extent necessary to make that pig deal of yours fly. You need both to be effective, and it takes time to build such internal and external networks based on favors, information exchange, and back scratching.

You cannot hire a bunch of superstar rainmakers who do not know each other—a favorite technique of foreign entrants to our market—and expect them to be as effective together as they were in their previous institutions. They simply do not have the internal networks required to be as effective as you expect them to be. This is what investment banking honchos really mean when they talk about "culture." Extensive, robust, and proven internal networks are as essential to the proper functioning of an investment bank as its external client list. Both take time to build, and both must be built organically.

But everyone knows that investment banking is only about money, right? I remember a business school professor of mine, a published, well-respected, intelligent professor of management strategy, who told me in 1989 that if I wanted to become a successful investment banker I should go where the money is. She recommended Japan. Oops.

What my professor did not realize, and what many other intelligent people—yes, even financial journalists—do not realize is that investment bankers do not need to go where the money is to ply their trade. The money comes to them, and it gladly pays their exorbitant transaction fees because they really do add value in connecting their clients with the internal and external networks for capital and governance.

So calm down, all you worried Analyst and Associate wannabes: you do not need to rush out and learn Arabic in order to have a job in five years time. (Or Chinese, or Russian, or Portugese, for that matter.) Other than bags of shekels, Al Noor Islamic Bank seems to have nothing of what it needs to become a credible threat to Goldman, Citigroup, or even Deutsche Bank in the US: no people, no clients, no skills, and no relationships. Furthermore, it appears to want to wade into the biggest shark tank on the planet with both feet tied together and a nasty cut on its forehead. How else would you describe a bank that wants to be a player but which cannot participate in the largest securities market out there, fixed income? "Daft" might be polite.

Although, now that I come to think of it, Al Noor's Shariah prohibitions against charging interest might be an advantage in the current credit market meltdown. "We didn't put you in those nasty CDOs or subprime mortgage derivatives, Mr. Investor. Now, how about a nice plate of dates?"

Who knows, it might be kind of fun to do M&A deals dressed like Lawrence of Arabia. Inshallah.

© 2007 The Epicurean Dealmaker. All rights reserved.